AtCYP38 is a thylakoid lumen protein comprising the immunophilin domain and the phosphatase inhibitor module. Here we show the association of AtCYP38 with the photosystem II (PSII) monomer complex and address its functional role using AtCYP38-deficient mutants. The dynamic greening process of etiolated leaves failed in the absence of AtCYP38, due to specific problems in the biogenesis of PSII complexes. Also the development of leaves under short-day conditions was severely disturbed. Detailed biophysical and biochemical analysis of mature AtCYP38-deficient plants from favorable growth conditions (long photoperiod) revealed: (i) intrinsic malfunction of PSII, which (ii) occurred on the donor side of PSII and (iii) was dependent on growing light intensity. AtCYP38 mutant plants also showed decreased accumulation of PSII, which was shown not to originate from impaired D1 synthesis or assembly of PSII monomers, dimers and supercomplexes as such but rather from the incorrect fine-tuning of the oxygen-evolving side of PSII. This, in turn, rendered PSII centers extremely susceptible to photoinhibition. AtCYP38 deficiency also drastically decreased the in vivo phosphorylation of PSII core proteins, probably related to the absence of the AtCYP38 phosphatase inhibitor domain. It is proposed that during PSII assembly AtCYP38 protein guides the proper folding of D1 (and CP43) into PSII, thereby enabling the correct assembly of the water-splitting Mn(4)-Ca cluster even with high turnover of PSII.